Here’s why an October interest rate hike could be good news for the Canadian housing market

Rising interest rates are frequently cited as a potential issue for Canadians looking to purchase a home. But according to one economist, they’re actually good news for the country’s housing market.

“Canada’s previously hot housing market and robust household borrowing trends have given way to much calmer activity in 2018, and that’s a good thing,” writes Douglas Porter, chief economist at BMO, in a recent note.

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According to Porter, stricter mortgage rules and rising interest rates have taken the market out of bubble territory into a more healthy and balanced state.

The Bank of Canada (BoC) raised the overnight rate to 1.50 percent in July, and is widely expected to do so again later this week.

“Policymakers probably couldn’t have asked for a better outcome for the national market this year, with September figures showing MLS prices up 2.3 percent — almost precisely in line with [inflation] pace of 2.2 percent last month,” he writes.

Other good signs? Household debt growth has cooled to its slowest pace in 35 years, a relief for a country with some of the highest debt levels in the world.

“Even the two previous rowdies — Vancouver and Toronto — are now looking at price gains of just a bit above 2 percent,” notes Porter.

But while he cites higher interest rates as a key factor in the cooler conditions, Porter is quick to note that raising rates too fast could have a negative impact on the market. That’s why the BoC should take its time raising rates after its likely October hike.

“Still, there are plenty of warnings about the past build-up in debt and the vulnerability of the household sector to further rate hikes, a key reason why the Bank of Canada is likely to remain on a gradual tightening path,” he concludes.